Anyone can be a banker with peer-to-peer lending

MIAMI - When Walter Kond needed $25,000 to buy a shipment of home-theater seats for his company to resell, he didn't go to the bank. He went online.

Kond posted a loan request on Prosper.com and a few days later, more than 300 absolute strangers had pooled together the cash for a three-year loan at 13 percent interest.

Welcome to the world of peer-to-peer lending - where anyone with Web access can be a banker and small-business owners like Kond are finding a new way to raise cash.

The industry is still in its infancy, but has been catching fire as major players enter the market. The UK's Zopa - considered the granddaddy of the niche - launched its U.S. operations in December, California-based Lending Club debuted on social networking giant Facebook in May, and billionaire Richard Branson relaunched Circle Lending as Virgin Money USA in October.

"There is so little innovation in traditional consumer finance that anytime something new like this comes along, it's a rarity and something to watch," said George Hofheimer, chief research officer at Filene Research Institute in Wisconsin, which studies the lending sector. "This has a high probability of being what academics refer to as a disruptive innovation.'"

Each of the services offers its own twist on peer-to-peer lending, but in Prosper, Kond says he found an intuitive, pain-free way to finance the imports for his online store Miacom.

Walking through the Miacom warehouse - stacked with everything from shredders to mahogany security doors - Kond said he first heard about Prosper during an eBay convention a few years ago. In June, seeking a short-term loan to buy a shipping container of home-theater chairs he had spotted in Asia, Kond posted a seven-day ad on Prosper outlining what he wanted to do with the money and offering a 14.5 percent annual return.

"For the first three or four days there was nothing, but then we started

getting corporate bidders and people who (make loans) for a living," Kond said. Prosper's lenders offered amounts from $50 to $1,000 and bid the interest rate down to 13 percent. "The next thing you know we have 25 grand and the container was on its way," Kond said.

While 13 percent is higher than Kond might get at his local bank, there are no penalties for paying off the Prosper loan early - and the process was far more pleasant, he said. In business since 1994, Kond said when he goes to banks, he still feels on the defensive: "I feel like they are looking for holes in my character or credit report (to find excuses) to not lend me money."

At Prosper, on the other hand, bidders were actually competing to give him cash.

Since launching in 2006, the company has facilitated $110 million in loans from 550,000 users and has an overall default rate of 1.37 percent.

The default rate on its highest rated, AA-loans is 0.27 percent - in line with brick and mortar banks.

While P2P sites are particularly well suited for those with shaky credit who might not qualify for a regular bank loan, the concept is also catching on with more coveted borrowers, said Prosper CEO and Founder Chris Larsen. When Prosper launched in 2006, about 75 percent of all borrowers had AA credit.

Now, almost 95 percent are in that category and just 5 percent are considered subprime borrowers, he said.

"I think that's a reflection of the credit crunch limiting options for even the best customers," Larsen said.

If going online to get a loan from mom sounds counterintuitive, it can make financial and emotional sense, Virgin Money USA President and CEO Asheesh Advani said.

"The tax and legal benefits are compelling," he said. "When you loan money to your kids through Virgin Money (say, to buy a house), your kids can deduct the interest that they pay you from their taxes just like you would do with a bank."

Kond, for one, has embraced the P2P concept. A few months ago he lent $500 at 17 percent to a Prosper member and has been receiving monthly payments ever since.

"It worked out for me as a borrower," he said. "And it seems to be working out for me as a lender as well."